Consider the case of the Cast Iron Company. On each nondelinquent sale, Cast Iron receives revenues with a present value of $1,280 and incurs costs with a present value of $1,000. Cast Iron’s costs have increased from $1,000 to $1,130. Assuming that there is no possibility of repeat orders and that the probability of successful collection from the customer is p = 0.97, answer the following.
a-1. What is the expected profit of granting credit? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
a-2. Should Cast Iron grant or refuse credit?
b. What is the break-even probability of collection?